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The 5 Es of Economics After reading this lecture you should understand the following (regardless of what you may read in the popular press):

Why it is GOOD for the people of Florida if, after a hurricane strikes, the price of plywood (or other products) increases from $10 a sheet to $30 a sheet

Why it was GOOD when the Coca-Cola company(or other companies lays off 6000 workers as they did in the year 2000.

Why the price of gasoline in the United States is TOO LOW (we may have to wait until after we finish chapter 5 to truly understand this.)

Why it is GOOD when companies "outsource" (or move) jobs to India and other countries (again, we may not really understand this right away but we should after chapters 5 and 18).

Confused? After you study the "5Es of Economics (below) it will begin to become more clear.

The 5 E's of Economics

The following discussion on the 5Es of Economics was borrowed (and modified) from: Economics: The Options for Dealing with Scarcity by Frank D. Tinari, Scott, Foresman and Company, 1986.

I. What Is Economics?

Just what is the study of economics? The definition that I like best is:

Economics is the study of how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants

This definition has four parts that we need to discuss:

the "study of" economics choice scarcity maximizing satisfaction

The definition of "economics" that I used when I first began teaching was:

Economics is the study of why Mark doesn't have a boat. ( NOTE: Soon after I moved to Illinois I bought a house in Wonder Lake in McHenry County. Wonder Lake is a nice lake, but we didn't own a boat.)

This definition highlights an important component of economics: SCARCITY. The reason why I didn't have a boat, or the reason why you don't have everything that you want, is because of SCARCITY.

The term "scarcity" has a slightly different definition in an economics class than it does in the "real" world.

NOTE: Many words have different meanings in an economics class than the definition that you may already know. For example, let's take the word DEMAND. If I ask you "What happens to the demand for boats when the price of boats goes up?"

If the price of boats goes up, then demand for boats goes. . . . ..

NO! THE DEMAND DOES NOT GO DOWN. The quantity demanded goes down, but not demand itself BECAUSE ECONOMISTS HAVE A DIFFERENT DEFINITION FOR DEMAND. We'll talk more about that later.

Another example is the word INVESTMENT. In an economics class the term "investment" does NOT mean the stock market, money markets. or mutual funds. We will have to call such things "financial investments" because the term "investment" has a different meaning in economics.

Is is important to be aware that economic terms may have a different, and more specific, definition in a college course than they do outside of class. You, of course, need to learn this new definition.

So back to the term SCARCITY. Scarcity does not mean that only a little of something is available. For example, I grew up in northeastern Minnesota. About 30 miles away from my hometown was the town of Erskine, Minnesota. Just outside of town a certain type of rock exists that occurs nowhere else in the world. They have named it "Erskinite". Erskinite is only found near Erskine, Minnesota and only a little of it has ever been found. BUT IT IS NOT SCARCE. -- WHY? - -

Erskinite is not scarce because nobody wants it. For there to be scarcity things must be LIMITED and WANTED. There is plenty of ERSKINITE and it IS NOT SCARCE because nobody wants it.

Goods and services are scarce. These are the things that we want. Goods are tangible things that satisfy our wants (like boats, computers, cars, etc.), services are intangible things that satisfy our wants (like the services of an accountant, or a dentist, or a lawyer). Even in the United States - one of the richest countries in the world - goods and services are scarce. WHY?

This brings us to another important principle in economics.

After teaching economics for a year or so, I bought a boat. Since I defined economics as the study of why I didn't have a boat - I had a problem. But then I simply changed my definition slightly. Now economics is: the study of why Mark doesn't have a. . a. . .a what? Economics is the study of why Mark doesn't have a BIGGER boat.

This brings us to that second principle: economists assume that humans have UNLIMITED WANTS. Once I got a boat, I wanted a bigger boat. After getting a bigger boat I wanted a sailboat. then a row boat, and. . . and the list goes on and on. (I used to own 5 boats and I wanted a jetski.) Do we ever have EVERYTHING that we could ever want?

Since human wants are unlimited, and resources used to satisfy those wants are limited - there is scarcity. Even in the US, one of the richest countries in the world, there is scarcity -- if we use our new definition of SCARCITY. Do you have everything that you want? There is always scarcity, because human wants are unlimited.

This then brings use to a third important idea: Because of scarcity we MUST MAKE CHOICES. Some economists call this the "economizing problem". We can't have everything that we want so we have to choose.

The authors of our textbook define economics as: "The social science concerned with how individuals, institutions, and society make optimal (best) decisions under conditions of scarcity"

This is what economics is really all about - MAKING CHOICES. Because of scarcity we as individuals, and our society as a whole, must make choices. For example when I was thinking about buying a boat, I also needed shoes for my daughter. If we assume that I couldn't afford both (again - can you afford everything that you want?) I had a choice to make a boat or shoes?

Hm-m-m-m-m? ? ? - - - - - I bought a nice boat!

It is important to note that our GOAL is to make choices that reduce scarcity as much as we can. Because of unlimited wants we can never eliminate scarcity, but it can be reduced by the right choices.

Another way to say this is that we want SOCIETY to get the MAXIMUM SATISFACTION POSSIBLE out of our limited resources. We don't want to make just any choice, we want to make the BEST (or optimal) choice.

There are three, and only three, options (choices) for society to deal with scarcity, and all societies must deal with scarcity because there are limited resources and unlimited wants.

Those three options are:

Economic Growth (Getting more resources) reduce our expectation or wants (we won't spend too much time on this option) use our existing resources wisely (Don't waste the few resources that we do have.)

There are four ways to use our existing resources wisely. They are:

Productive Efficiency Allocative Efficiency Equity Full Employment

The 5Es of Economics, or the five ways for society to reduce scarcity, then are:

Economic growth Productive Efficiency Allocative Efficiency Equity Full Employment

A 6th "E" of economics might be Reducing Expectations, but economists do not spend much time discussing this option for dealing with scarcity.